ADDvantage Technologies Group Inc (AEY) 2020 Q2 法說會逐字稿

Welcome to the ADDvantage Technologies Second Quarter 2020 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Brett Maas of Hayden IR. Please go ahead.

Thank you, operator. We are joined today by Joe Hart, President and CEO; Scott Francis, Chief Accounting Officer.

Before we begin today's call, I would like to remind everyone that this conference call may contain forward-looking statements, which are made subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include, among other things, statements regarding future events, such as the ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers and multiple system operators as well as -- I'm sorry, future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned that these forward-looking statements are only predictions and may materially differ from the actual future results or results due to varying factors such as those contained in ADDvantage Technologies most recent report on Form 10-K and 10-Q on file with the Securities and Exchange Commission.

Financial information presented on this conference call should be considered in conjunction with consolidated financial statements and notes included in the company's press release issued earlier today and included in ADDvantage Technologies' most recent reports on Form 10-K and 10-Q. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is subject to change. Although any such guidance and factors influencing it may change, ADDvantage Technologies will not necessarily update the information as the company will only provide guidance at certain points during the year. Such information speaks only as of the date of this call.

During this call, we may also present certain non-GAAP financial measures such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website at addvantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials, and a discussion as to why we believe these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures.

I would like to now turn the call over to Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.

Thank you, Brett, and thank you, everyone, for joining us today. I want to start by expressing my hope that everyone on the call is healthy and safe. The ADDvantage team are all calling in from their homes today, and we've been working remotely and managing the business by Zoom calls like much of America for the past 6 weeks. The quarantine has created new challenges and shown the mirror on existing challenges across our entire society. The shift of employees from the office, where our resources were centralized, to a distributed workforce at home, spread all over.

Let's put a spotlight on the weakness of the existing network and serves as yet another catalyst for the 5G expansion. The stay-at-home orders are underscoring the importance of connectivity via telecom and highlight the critical role it plays in our lives from distance learning for students, collaboration for remote workforces, viewing of digital entertainment and the rapid acceptance of telemedicine. But while the need has never been greater, in the near term, the pandemic, along with M&A activity in our industry and other factors have slowed the 5G initiative. This industry-wide timing pattern coupled with some operational issues in our wireless segment, which we have addressed and the impact of nonoperational write-downs in our telco segment contributed to performance that did not meet our expectations. The sudden and dramatic shift in the economic climate had a significant impact on our financial results for the second quarter of fiscal 2020. While our construction crews are designated as the central workers, and we are able to proceed on any project offered us, the slowdown in overall site construction by the carriers and the COVID disruption, delayed the awarding of many projects, resulting in a 7% year-over-year decline in our revenue.

In addition, our Nave and Triton businesses experienced softening sales during the quarter. This is not unexpected given the challenges in a COVID-19 environment. Many businesses not only ours have been impacted. However, I am encouraged that during challenging economic periods, the need for less expensive used telecom equipment grows. And with it, we often see growth in demand for our repair services. As such, we continue to improve operations and personnel to position us for profitable growth during the weeks and months to come and as the economy recovers. While our visibility is limited in the near term, we expect that the economic recovery will largely drive the pace at which telecom projects resume and 5G installations accelerate and provide a catalyst for improvement in our top and bottom line results.

More importantly, our business strategy remains unchanged, and we remain optimistic about long-term growth opportunities. The steps we have taken to reposition the company, put us in a stronger position to capture a meaningful share of market opportunities when activity inevitably resumes. Through acquisitions, we have built a core infrastructure and range of offerings that enable us to compete effectively for more business and by continuing to improve our existing operations and personnel, while further refining our inventory management practices, we are positioning for profitable growth as circumstances improve.

In our wireless segment, we expect flat revenue performance for the second half of the fiscal year as the timing of an acceleration in 5G adoption remains unclear. In the interim, we recently made several key leadership changes to address operational issues that impacted our second quarter results and specifically, our gross margins. We believe these changes will result in a return to more normalized gross margins going forward. We remain confident in our business strategy, and our ability to capture a meaningful share of 5G infrastructure projects once the massive rollout inevitably accelerates in the regions we serve. This opportunity continues to be significant despite limited visibility on the timing.

Just this week, at an investor conference, T-Mobile's President of Technology noted that they plan to upgrade 1,000 existing sites per month to 5G and will be expanding their nationwide macro base station footprint by 15,000 towers during the coming years. This is part of a CapEx investment of $60 billion.

He also said that by this summer, T-Mobile expects to increase the number of sites per month that will receive 2.5 gigahertz 5G radios from approximately 65,000 macro sites that exist today, with initial plans to upgrade 25,000 to 30,000 within the next 2 years. In addition, he said that T-Mobile is in active discussions with tower companies to build an additional 15,000 sites to reach their goal of 85,000 macro sites across the United States. We also heard recently that DISH Wireless will begin rebuilding -- sorry, will begin building its new 5G network sometime later this year. And that AT&T and Verizon will continue to expand their initial 5G footprint throughout the country into new markets over the next few years.

Most of the tower crews are positioned throughout the central region of the country and continue to work today through this pandemic by following all of the best practices for safety and hygiene. We believe that we are ready and deployed to take advantage of the growth curve for 5G that will be ramping up during the second half of this calendar year in the regions that we serve.

In our Telco segment, we continue to refine our operations, particularly our inventory management systems and the valuation of inventories on hand. This resulted in a write-down of obsolete inventory at Nave and Triton for an aggregate amount of $2.3 million. While this charge was noncash, it clearly impacted our gross margins for the quarter. We have put additional inventory controls in place and believe our inventory challenges have been largely resolved. Whilst we are reporting for the second fiscal quarter triggered a revaluation of intangible assets, including goodwill related to acquisitions that we made over the past few years. The revaluation resulted in an impairment charge of $3.9 million related to intangible assets and a $4.8 million goodwill impairment during the quarter. These noncash items also had an impact on our bottom line.

In the end, the noncash write-down of inventory and impairment charges had a negative impact to earnings of $11 million. Despite the impact of the write-downs in the second fiscal quarter that were largely driven by legacy inventory management practice, Triton and Nave often perform well in a challenging economy, as businesses look to repair instead of replace existing telephony systems. Given the current economic landscape and our limited visibility for demand over the next few quarters, we have evaluated our liquidity position and access to capital under a number of scenarios to conclude that we are now sufficiently capitalized to weather the near-term market and economic conditions brought about by the current pandemic until more normalized business conditions return. This included a new long-term bank loan of $3.5 million and a $2.9 million SBA loan, at least a portion of which we expect will convert to a grant.

Scott will provide additional details about our balance sheet momentarily, but I'm confident that we have sufficient capital resources and a stronger balance sheet to support the execution of our plans to be a meaningful participant in future 5G activity.

With that, I will now turn the call over to our Chief Accounting Officer, Scott Francis, for a more detailed review of our financial results. Scott, please go ahead.

Thank you, Joe. For the second quarter of fiscal 2020, our total sales were $12 million, which are down 7.2% from $12.9 million for the second quarter of fiscal 2019. The decrease in sales was due to weaker near-term economic and market conditions in both of our business segments. Revenue for the wireless segment was $4.7 million in the second quarter of fiscal 2020, an increase of $500,000 compared to $4.2 million in the year ago quarter. Our sales for the Telco segment were $7.3 million for the 3 months ended March 31, 2020, which was down from $8.7 million for the same period of last fiscal year. The decrease in sales for the Telco segment was primarily due to a $1.1 million decline in equipment sales at Nave.

Our gross profit decreased $3.9 million to a loss of $439,000 for the second quarter of fiscal 2020 compared with a gross profit of $3.5 million in the year ago quarter. Gross profit for our wireless segment was $200,000 or 4% for the second quarter of fiscal 2020 and $1.3 million or 31% for the same period of last year.

Our Fulton business incurred additional operating costs in the second quarter of fiscal 2020, resulting from operational inefficiencies we experienced when we repositioned our southern workforce to the North. As Joe indicated earlier, many of these operational issues have already been addressed, which should now allow for normalization of margins in future quarters.

For the Telco segment, our gross profit was a loss of $600,000 for the second quarter of fiscal 2020 compared to gross profit of $2.2 million in the year ago quarter. Our gross profit was negatively impacted in this segment by an increase in inventory obsolescence expense of $2.1 million, and an increase in lower cost of market inventory valuation adjustments of $200,000 at our Nave and Triton businesses.

As Joe discussed, we have put additional controls in place to improve our inventory management going forward. Operating expenses increased $129,000 to $2 million for the 3 months ended March 31, 2020, compared with $1.8 million for the same period of last year.

Our selling, general and administrative expenses increased $480,000 to $3.1 million for the second quarter of fiscal 2020 compared with $2.6 million for the same period of last year. This was primarily due to increased payroll-related expenses as we were ramping up our back-office support in our wireless segment last year. In the second quarter of fiscal '20, we performed an assessment of our intangible assets and goodwill as a result of our continued operating losses and the uncertainties surrounding the COVID-19 pandemic on the overall economy and the resulting impact on our business. This assessment resulted in recording noncash impairment charges in our Telco segment totaling $8.7 million against intangible assets and goodwill. Other income for the second quarter of fiscal 2020 was $46,000 compared to other expense of $5,000 for the second quarter of fiscal '19. The increase was due to interest income of $87,000 earned on our promissory note from Leveling 8, which was resulted from the sale of our cable businesses last year, and this was partially offset by an increase in interest expense of $39,000 on our outstanding debt. The loss from continuing operations were $14.7 million or a loss of $1.41 per diluted share for the second quarter of fiscal 2020 compared with a loss from continuing operations of $1.2 million or a loss of $0.12 per diluted share for the same period in 2019. Adjusted EBITDA for the 3 months ended March 31, 2020, was a loss of $5.4 million compared with a loss of $909,000 for the period a year ago.

Now turning to the balance sheet. Cash and cash equivalents were $4.2 million as of March 31, 2020, compared with $1.2 million as of September 30, 2019. As of March 31, 2020, the company had net inventories of $5.4 million compared to $7.6 million as of September 30, 2019. The company had $3.5 million drawn on its revolving line of credit as

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payable for a total debt of $7 million, this compares to no debt as of September 30, 2019. Subsequent to quarter end, we entered into an SBA Payroll Protection Program loan in the amount of $2.9 million, which we intend to use for proceeds for the payment of payroll expenses, rent and utilities, in accordance with the guidelines of the loan. Of the $6.4 million in proceeds received from the $3.5 million note payable which we got in March of 2020 and the $2.9 million Payroll Protection Program loan, we believe that most of these payments for these loans will not have to be repaid using funds generated from our own operations. The $3.5 million note payable will be paid by payments received from our promissory note with Leveling 8, and we anticipate that the Payroll Protection Program loan will mostly be forgiven under the rules still being finalized by the SBA and Congress. We also recently filed a shelf registration statement and could raise additional cash by selling common shares utilizing at the marketed offering. As Joe discussed, we believe we are sufficiently capitalized with appropriate backstops to support our near-term business conditions until more normalized conditions return. This concludes the financial overview segment of our remarks.

I will now turn the call over to the operator to facilitate any questions.

The first question is from [George Gaspar], private investor.

Can you hear me? Hello? Hello?

Yes, George. Yes, we can hear you.

Okay. Could you relate your operations on the -- your wireless crews count right now, how many crews do you have inside your company. How many are you using outside? What are the comparisons at the end of the past quarter here versus the previous quarter and the beginning of the year? Can you give me a handle on that?

Yes, George, that's kind of a fine line between providing our competitors' information on our resources, different than what we might provide to customers. So I'd like to not be too specific on that. I would say that the workload has decreased pretty dramatically from the start of Q2 to the end of Q2, and it is sort of flattening out at the moment. In total, we probably have half the number of crews that we started the quarter with, in totality. And we're sitting there right now. Now I'm pretty sure, George, you've asked this question on previous quarters. So you probably have some notes that you're comparing it to. And I have told you that, in general, we like to have a balance of about, say, 40% in-house crews to 60% subcontractor crews. And that can vary up and down as you're going through the year. And having all -- that many some subcontractor crews provides kind of some insulation to our internal employees.

At the moment, we are predominantly in-house crews. So we have worked hard to protect our own internal workforce. They are fully engaged at the moment. And we have enough work for them. And we have some smaller complement subcontractor crews, but by having the PPP loan, it has allowed us to really focus on protecting our own employees in keeping the in-house crews working. So kind of a combination of what the market is dictating as far as purchase order value and consistency as well as the ability to keep the internal employees on the payroll.

Right. Okay. And next question would be, could you give us a geographical outline of predominantly where you're working on the wireless and your install for 5G?

Well, we don't have any 5G work happening at the moment because we work in the Central region. So throughout the Midwest, so basically from Ohio across to Nebraska across the top of the country. And then we work down into Oklahoma, Arkansas, Texas. But 5G hasn't really taken hold much in the Central U.S., people like T-Mobile just announcing they've been concentrating on the Northeast quarter. So typically, you would see work, for some reason, they chose Philly for one of their first 2.5 gigahertz 5G installations, Philly and New York City. And then you might see LA, San Fran come next. But central region with Chicago, Dallas and Houston will be sort of next on the list. So I believe that most likely fourth quarter, we'll see central region 5G start.

George. Well, weather had some impact in Q2 as it always does January through March up North, right? And so it slows you down. It doesn't stop you. But the lion's share of our work this last quarter was up in that whole Midwest to Northern Plains region. So it slows things down, but it doesn't stop them. So -- I would just ask you that on our last call, other callers ask that we kind of limit the number of questions in a row. So if you don't mind, I'd like to take some other questions. And then if there's time, we could circle back to you later. Okay? Thanks.

(Operator Instructions) This concludes the question-and-answer session. I'm sorry.

If we do have time, operator, then we should respect, George, if George had an additional question.

The next question is from [Sam Heffernan] with BB Capital.

So are you going to focus in the next 2 quarters on just I mean to put a bumpy surviving? Are you going to be focused on in debt? Or kind of what is going to be the strategy of kind of going forward in the next 2 quarters, just kind of in a broad -- just add a little bit more color to that.

Well, I would say, assuming that the workload that we have in front of us today, continues at a relatively flat level, which for us, is the low point of most fiscal years so typically, we bottom out in Q2 from a revenue perspective because of the weather up north and the slowdown in business. It's also the changing of fiscal years for the big customers of ours. So assuming that, that revenue stays flat, as I said, we were predicting for the next 2 quarters, then our focus is to try to get all of our costs in alignment with a lower revenue expectation. Try to do our very best to maintain our field workforce through the slower periods. And then at the same time, make sure that we have the bone and muscle to be able to scale back up when the 5G wave of site construction begins, which I believe will start sometime between July and the end of the year, but I don't particularly have that knowledge of when the carriers precise schedules will take place. So it's more about keeping costs in alignment, trying to continue to look for some improvements in our SG&A and things like that. But the debt, we don't have any intention to increase our debt. And well, as Scott said, we are fortunate that we have the mechanisms to pay for that debt.

The next question comes from [George Gaspar], private investor.

Ongoing -- talking about the implementation of 5G moving forward. Can you describe a little bit about your work from the main towers that you're doing work on? And what's the prospect moving away from those towers that gives you opportunity to spread the connectiveness out into an area. Can you do a little explanation on that?

Well, I think that there's -- from our perspective, there's 2 aspects to this. There's the macro sites which are the big towers or the work tops of buildings that are sites that control a geographic cell coverage area. Then there is the small cell activity, which is light pole, telephone poles, billboards, well sort of 30-foot to 40-foot off the ground level activity. I think we see -- on the small cell side, we see the continued reluctance and slowness in the municipal permitting and approvals processes. So I think the small cell activity, generally speaking, is sort of slowed down by that. Now it's also the change of going from 4G to 5G. So whatever equipment they're going to use for 5G, that also has to be decided upon and ordered from the OEMs for small cells, just like the macro sites. So I think there's a lot of engineering work going on by all the carriers to make those final decisions and work with the manufacturers on getting in queue for the manufacturing cycle. So I don't see a bulge of work right now on the small cell, but we have the ability and have done some small cell deployments in the past and some in Fort Worth, some in [Hua] up in Minneapolis and a few other markets. But it's been sporadic at best so far.

Okay. All right. And then can you elaborate a little bit on the recent consolidation that you made in the telephonic area in north of Miami and the consolidation that you had to go through and how do you expect -- what are you going to do here to really start revving up your sales volume? Will it be the sale of new product? Or will it be an expanded amount of repair work. Can you give us a little thought on that?

Well, there's 2 aspects, right? There's the Nave operation, which was in Baltimore, and we moved the actual inventory. We moved it down to Huntsville, Alabama to [Telco]. Right. So they're -- they do all that inventory control, pick packing ship, they do that from Huntsville. We also recently moved to a new facility just outside Miami for the Triton folks. And that operation is working very smoothly, and the production is really in good shape. And it's really a nice operation with great people and good processes. So focus now needs to be on really developing our relationships with carriers and resellers of hosted PBX services and also work in some of the larger manufacturers like an IBM, Juniper, Ciena, trying to expand the relationships so that even though we have 2 small divisions that we can provide value-added services, either in repairing products or in providing refurbished products.

And the biggest thing that could help us is for the solution to the current COVID-19 crisis because Triton is a PBX telephone switches, routers, product, which is for office environments, and business environments. And most of those people are now working from home, right, for the last 1.5 months and potentially for the next few months as well. So we saw a little spike in business when people move to their homes because their companies gave them office phones to take with them, right? So they could still be in the company network. And when they move back into their offices, we expect to see a subsequent spike when that takes place. So a little bit of that's uncertain George, as to timing of resolution to the current pandemic.

I see. Well, that's a good explanation. If I could ask one additional question. This would be on the macro view outside of your general operations currently. Do you see any possibilities of trying to broaden your capacity of the work that you do in maybe the wireless area, particularly to keep your crews busier or to just broaden the horizon for revenue-generating capacity?

Well, I think all the major carriers generally are slower at the moment but going to build up to some kind of varying crescendo towards the end of the year as they go into 2021 for a full-blown 5G buildout. We, in the meantime, have been trying to win business and get long-term contracts with those companies that build brand-new sites on behalf of the carriers. So typically, the tower company. So whether it's a Crown Castle, SBA, government agency SBA, but the tower company, American Tower, Tillman Infrastructure, Uniti. I mean those companies that own their own towers and build their own towers, we've kind of focused on trying to win some business with them because that's -- that business goes on year round. So we are trying to broaden the portfolio from a customer base perspective.

Right. Okay. Okay. Sounds good. Okay. Well, I hope that you can work on getting through this current mess out because of the virus. And really pick up some momentum going toward the end of this year.

This concludes the question-and-answer session. I would like to turn the conference back over to Joe Hart for any closing remarks.

Well, I guess I would try to go off script for a second and just thank everyone for attending the call. And we appreciate your interest in ADDvantage Technologies. We've had some exceptional challenges and had to make some pretty drastic accounting adjustments in this past quarter, but we really do believe that we have a very good future ahead of us. And that you can read the industry trade news and press around what all the carriers are doing with 5G, and we're going to be a part of that. And we feel that we have a good future. And so we ask for your continued interest in our company. And thank you for tuning into the call today.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.